Without a Clue about Money, Retirement and Investing

By now, most of my regular readers know what I do not like in the world of financial products. The annuity galls me (a mix of insurance and mutual funds that doesn’t do either well), the ETF (which mimics the indexed mutual fund but allows you to trade it just like a stock and pay for the privilege of trading just like a stock) and any tool that gives you the impression that you can set it and forget it.  There are others, but at the top of that list is the target-date fund.

The products are all hyped and re-hyped by the those that sell them as the easiest way to wealth.  The belief that sales people from the world of finance care about your well-being or what is known as fiduciary responsibility, may be the biggest mistake the vast majority of us make.  And the folks who make these mistakes are often wary of every other type of sales approach in every other facit of their lives.

So why, when it comes to target date funds do they simply believe the following: pick a date in the future and our mutual fund manager will adjust and readjust the underlying holdings of the account to protect your hard earned money, so, that when you retire, you will have a conservative allocation of funds that will serve you well into the future?

Click here to read more about target date funds from Paul Petillo, managing editor Target2025.com

Missing the Target; Gaining Praise

Target date funds, those investments that pick a date in the far off future and sell you on the notion that your retirement plan is headed in the right direction continue to lose ground.  But that doesn't stop this default investment for the widely used defined contribution plan - your 401(k) - from receiving inflows in record amounts.

After the 2008 investment season and early into 2009, there were only a handful of investors who could claim to have these elusive skills. As far back as Benjamin Graham, the skill that was needed to be a successful investor was widely believed to be a possession of the few.  It wasn't necessarily the wealthy either.  But a subset of the populace who, for some reason, understood the mechanism better than others.

This led more than few folks to look at target date funds as an investment that might hold the elusive key to investment success. Money poured into these types of funds and continues to this day.  This in large part because of the default option that new hires receive.

While all investors face the same problem, those further along in their careers have an unique problem. Too conservative and there won't be enough money.  Too aggressive and there may be losses that are not welcomed.  But target date funds, while they have gained praise as they continue to underperform, are not the answer.

Paul Petillo is the Managing Editor of Target2025.com